Good Credit, Better Rewards: Auto Insurance Benefits

A good credit score can lead to cheaper car insurance rates. In most US states, car insurance companies use credit scores as a major rating factor when setting potential customers' rates. This is because insurance companies view drivers with high levels of credit as less risky customers. The better your credit score, the lower the chances that you will file a claim, which usually means you'll get better car insurance rates.

While the practice is controversial and banned in California, Hawaii, Massachusetts, and Michigan, drivers with poor credit are often hit hard by higher prices. For example, the average annual rate for drivers with poor credit is $4,349, compared to $2,033 for drivers with excellent credit.

Several factors contribute to a good credit-based insurance score, including outstanding debt, credit history length, credit mix, and payment history. Improving your credit score can take time but is worth it to ensure you get the lowest possible rate for your policy.

How credit scores affect auto insurance rates

Credit scores can have a significant impact on auto insurance rates, with those with poor credit often facing higher premiums. This is because insurers believe that those with poor credit are more likely to file claims and be a higher risk. As a result, they compensate by charging more.

In most states, an individual's credit score can play a role in determining their auto insurance premium. Research has shown that individuals with a good credit history are less likely to file claims, and insurers often reward these customers with lower rates. On the other hand, those with a poor credit history may be viewed as higher-risk and face higher premiums.

The impact of credit scores on insurance rates varies between states. While most states allow insurers to factor in credit history when determining rates, some states, including California, Hawaii, Massachusetts, and Michigan, have regulations that prohibit or limit the use of credit scores in setting insurance premiums. In these states, insurance rates are based on factors such as driving record, location, and other characteristics.

It's important to note that insurance companies use their own proprietary credit-based insurance scores, which are different from the traditional credit scores used by creditors. These insurance scores are based on factors such as outstanding debt, credit history length, credit mix, and payment history. Improving one's credit score can take time but can ultimately lead to lower insurance rates.

Additionally, getting a car insurance quote typically does not affect an individual's credit score, as insurance companies usually perform a soft credit inquiry, which does not impact the credit score.

States where credit scores don't affect auto insurance rates

While most US states allow insurance companies to use credit-based insurance scores when determining car insurance rates, a few states have banned or restricted the practice. Here is a list of states where credit scores do not affect auto insurance rates:

• California: In California, insurance companies are not allowed to use credit scores or credit history when underwriting or setting rates for auto insurance policies.
• Hawaii: Hawaii prohibits insurers from using credit ratings to determine auto insurance policy prices.
• Massachusetts: Insurance companies in Massachusetts cannot use credit information or credit-based insurance scores when setting rates, underwriting, or renewing auto insurance policies.
• Michigan: Insurers in Michigan cannot use credit information or credit-based insurance scores when setting rates, renewing policies, or underwriting new policies. They also cannot use credit scores as the sole basis for denying, cancelling, or not renewing a policy.
• Maryland: In Maryland, auto insurers can use credit history to determine rates for new policies but cannot use it to deny applications, cancel policies, refuse renewals, or increase renewal premiums.
• Oregon: Insurers in Oregon cannot cancel or refuse to renew a policy based on credit. They can consider credit when deciding to offer an initial policy but cannot make it the sole deciding factor.
• Utah: While insurers in Utah can consider credit for initial underwriting, it cannot be the only determining factor. After 60 days of the policy, they cannot use credit information to cancel, refuse to renew, or decline coverage for additional vehicles.

It is worth noting that Nevada had temporarily restricted the use of credit-based insurance scores during the pandemic, but this restriction ended on May 20, 2024. Additionally, while not outright banning the use of credit scores, Texas and Colorado have placed limits on how insurers can use these scores.

Improving your credit score

Make On-Time Payments

Timely bill payment is crucial for shaping your credit-based insurance score. A pattern of late payments or credit delinquencies may indicate a potential risk in financial management to insurers, possibly signalling a higher likelihood of submitting minor damage claims. By making it a habit to settle your bills on or before their due dates, you can positively impact your credit and, consequently, your insurance scores. Set up autopay for at least the minimum amount due and create calendar reminders to help you stay on track.

Keep Hard Credit Inquiries to a Minimum

Credit inquiries come in two forms: hard checks and soft checks. Hard inquiries occur when you apply for a line of credit, and they do affect your score. Soft inquiries, on the other hand, such as when insurance companies review your credit, do not impact your score. Too many hard inquiries can negatively affect your score, so if you are working on building your credit, consider spacing out your applications for new credit.

Monitor Your Score Regularly

Keeping a close eye on your credit score has multiple benefits. Knowing your score enables you to take proactive measures to improve it. Additionally, regularly checking your credit reports can help you spot errors or signs of identity theft early on, allowing you to rectify any inaccuracies promptly.

Maintain Old Lines of Credit

Keeping long-standing credit accounts, even those with zero balances, can benefit your credit score. The duration of your credit history is a significant factor, accounting for 15% to 20% of your score. Instead of closing unused credit cards, consider using them sparingly and making timely payments. This approach helps fortify your credit history and can also lower your credit utilisation ratio.

Be Aware of Your Credit Utilisation Ratio

Your credit utilisation ratio measures how much credit you're using compared to your total available credit. While there's no rigid rule, experts generally recommend keeping your utilisation below 30%. Paying off some of your debt to bring your credit utilisation down may help improve your score.

In addition to these strategies, you can also diversify your credit mix by responsibly managing various credit accounts, such as credit cards, loans, and mortgages. This demonstrates to lenders and insurers that you can handle different types of credit effectively. Remember, improving your credit score takes time and discipline, but it's worth the effort to unlock better financial opportunities.

How to save on insurance with a good credit score

A good credit score can help you save on insurance, as it is one of the major factors used by insurance companies to determine insurance rates. Here are some tips to save on insurance with a good credit score:

Understand the correlation between credit score and insurance rates

Recognize the connection between your credit score and insurance rates. Insurance companies consider individuals with higher credit scores as less risky customers, leading to lower insurance premiums.

Shop around for insurance providers

Don't settle for the first insurance company you come across. Compare rates and coverage options from multiple providers. Getting quotes from different companies will help you find the best value for your money. Remember that each company weighs factors differently, so you may find better rates by shopping around.

Improve and maintain your credit score

Take steps to improve and maintain a good credit score. This includes paying your bills on time, keeping your credit card balances low, and limiting hard credit inquiries. A higher credit score will not only help with insurance rates but also benefit your overall financial health.

Be smart with your insurance coverage

Regularly review your insurance coverage to ensure it aligns with your needs. If you own an older vehicle, you may not need comprehensive or collision coverage. Assess the value of your vehicle and compare it to the cost of your premium and deductible. If the value of your vehicle is significantly lower, consider dropping unnecessary coverage to save on insurance costs.

Be selective with insurance claims

Whenever possible, avoid filing minor insurance claims. Remember that filing a claim can lead to an increase in your insurance premiums. Evaluate the cost of repairs and compare it to the potential increase in your insurance rates before deciding to file a claim. In some cases, it may be more financially prudent to pay for repairs out of pocket.

Take advantage of discounts

Look for insurance companies that offer discounts. Many providers offer a range of discounts, such as multi-policy discounts or safe driver discounts. By taking advantage of these discounts, you can further reduce your insurance costs.

Choose telematics or usage-based insurance

Consider enrolling in a telematics or usage-based insurance program. These programs base your insurance rates primarily on your driving behavior rather than just demographic factors. If you're a safe driver, this option can help you save money on your insurance premiums.

How auto insurance companies check your credit score

Auto insurance companies use what is known as a "credit-based insurance score" to set rates. This is different from the typical credit scores provided by FICO. While the factors used to calculate a credit-based insurance score are similar to those used in a regular FICO score, they are weighted differently.

• Payment history (40%): How you've made payments on your debt, including frequency and the amount paid off.
• Outstanding debt (30%): The amount of debt you currently have.
• Credit history length (15%): How long you've had an open line of credit.
• Pursuit of new credit (10%): Whether you've recently applied for new lines of credit.
• Credit mix (5%): The kinds of credit you have, including credit cards, mortgage or auto loans.

While auto insurance companies will pull your credit history when you buy a new policy, they do what is known as a "soft pull" or "soft inquiry", which does not affect your credit score. This is different from a "hard pull" or "hard inquiry", which does impact your credit score.

Frequently asked questions